CREATION OF AGENCY AND TERMINATION OF

AGENCY UNDER CONTRACT ACT

Introduction
The contract of agency is defined as one where one party the principal, grants authority to another
party-the agent, to act on behalf of and under the control of the principalto deal with a third party.
An agency relationship is fiduciary in nature. An agency can be created by express or implied
appointment, necessity or estoppel. There are certain duties that the parties owe each other. Since
the relationship of agency is one that is based on trust, there may arise circumstances where this
trust no longer subsists and as a result, the agency may have to be terminated. This paper examines
these situations and analyses the effect of the termination of agency.”
An agent’s authority can be terminated at any time. If the trust between the agent and the principal
has broken down, it is not reasonable to allow the principal to remain at risk in any transactions that
the agent might conclude during a period of notice.

Agency
Section 182 of the Indian contracts act 1872, defines Agent & Principal: an agent is a person
employed to do any act for another, or to represent another in dealings with the third parties. The
person for whom such act is done, or who is represented, is called the principal. Agency is the
relationship that subsists between the principal and the agent, who has been authorized to act for
him or represent him in dealing with others. Thus, in an agency, there is in effect two contracts i.e.
a) Made between the principal and the agent from which the agent derives his authority to act for
and on behalf of the principal; and
b) Made between the principal and the third party through the work of the agent.
Any person, who is of the age of majority according to the law to which he is subject, and who is of
sound mind, can employ an Agent1. As between Principal and third person a person may become an
Agent, so as to be responsible to his Principal according to the provisions contained in the Act. No
consideration is necessary to create an agency. Several types of commercial agents have been
recognized under Indian law, which includes inter alia brokers, auctioneers, del credere agents,
persons entrusted with money for obtaining sales and insurance agents.
Creation of Agency
By express appointment by the principal
Generally an authority is conferred by the Principal to the Agent. If the agent exceeds this authority,
then the principal will not be bound and the agent will be personally liable to the third party for
breach of warranty of authority.
However the common law may extend the scope of the agent’s authority beyond this, to protect an
innocent third party.
The principal will then be bound to the third party, but the principal can sue the agent for
overstepping his actual authority, if it’s a breach of the agency contract.

By implied appointment by the principal

The law can infer the creation of an agency by implication when a person by his words or conduct
acts as if he has such authority and the principal acknowledges that he was entitled to act
accordingly. Implied authority, is not specifically mentioned by contract but assumed or implied by
the nature of the relationship, are presumed to be given to an agent if that authority is necessary to
perform the duties or responsibilities otherwise assigned to the agent or representative.
Apparent / Ostensible authority
While actual authority arises from an agreement, apparent authority is that which the law regards
the agent as having, although principal may not have consented to the agent having such authority.
Apparent authority can happen in two situations:
Where principal by words/ conduct, makes a third party to believe that ‘agent’ has authority to make
contract for the principal
Where the agent previously had authority to act, but that authority was terminated by the principal
and the principal did not inform third parties that he has terminated it.

By necessity
The origins of the doctrine of necessitous intervention by someone who is in a legal relationship
with the defendant lie in the principle of agency of necessity, where an agent went beyond his or her
authority by intervening on behalf of the principal in an emergency. Because of the circumstances
of necessity, particularly the impracticability of the agent communicating with the principal, the
courts were prepared to treat the agent as though he or she had the necessary authority to do what
was reasonably necessary to save the principal’s property. If an agency of necessity was established,
the agent would be reimbursed for the expense incurred in rescuing the principal’s property.
An agency of necessity may be created if the following three conditions are met:
a) It is impossible for the agent to get the principal’s instruction.
b) The agent’s action is necessary, in the circumstances, in order to prevent loss to the principal to
prevent them from rotting.
c) The agent must have acted in good faith.
In an urgent situation, an agent has authority to act in the best interest for the purpose of protecting
his principal from losses.

By Estoppel
A person cannot be bound by a contract made on his behalf without his authority. However, if he by
his words and conduct allows a third party to believe that that particular person is his agent even
when he is not, and the third party relies on it to the detriment of the third party, he (principal) will
be estopped or precluded from denying the existence of that person’s authority to act on his behalf.

Ratification by the Principal

Agency by ratification can arise in any one of the following situations:
An agent who was duly appointed has exceeded his authority; or
A person who has no authority to act acted as if he has the authority.
When one of the above said situations arise, the principal can either reject the contract or accept the
contract so made.
When the principal accepts and confirms such a contract, the acceptance is called ratification.
Ratification may be expressed or implied.
The effect of ratification is to render the contract as binding on the principal as if the agent had been
properly authorized before hand.

Duties of an Agent to his Principal

Duty of an agent is list down from section 190 to section 218 of the Indian Contract Act 1872.
To obey principal’s instruction
To exercise care and diligence in carrying out his work and use such skill as he possesses
To render proper accounts when required
To pay to his principal all sum received on his behalf
To communicate with the principal
Not to let his own interest conflict with his duty
Not to make an secret profit out of the performance of his duty
Not to disclose confidential information or documents
Not to delegate his authority

Duties of Principal to His Agent

The duties of a principal to his agent are provided in sections 175 to 178. The main duties are:-
To pay the agent the commission or other agreed remuneration unless the agency relationship is
gratuitous.
Not to willfully prevent or hinder the agent from earning his commission.
To indemnify and reimburse the agent for acts done in the exercise of his duties.

Termination of Agency
Section 201 Termination of agency: An agency is terminated by the principal revoking his authority,
or by the agent renouncing the business of the agency; or by the business of the agency being
completed; or by either the principal or agent dying or becoming of unsound mind; or by the
principal being adjudicated an insolvent under the provisions of any Act for the time being in force
for the relief of insolvent debtors.
A contract of agency is a species of the general contract. As such, an agency may terminate in the
same way as a contract is discharged except where the agency is irrevocable. The relation of
principal and agent can only be terminated by the act or agreement of the parties to the agency or by
operation of law. “An agency, when shown to have existed, will be presumed to have continued, in
the absence of anything to show its termination, unless such a length of time has elapsed as destroys
the presumption”. The agent’s duty to act on behalf of the principal comes to an end on the
termination of agency. The timeframe for termination of an agency can be stipulated by a particular
statute or instrument. In such a case, if the instrument specifies in plain and unambiguous terms that
an agency will terminate without action on the part of the principal or agent upon the expiration of
the time specified in the instrument, the agency will in fact, terminate. If, after the expiration of the
time so stipulated in the contract, the parties continue their relationship as principal and agent, a
rebuttable presumption is raised that their relations are governed by the original contract and that
the contract is renewed for a similar period. For instance, if the parties entered into a contract for
one year and continued to act under the contractual terms after one year, the court will presume that
the parties in fact intended to keep the contract alive for another year.
On the other hand, if the parties did not fix any appropriate time for the termination of contract, the
contract is deemed to be terminated after a reasonable time. “What constitutes a reasonable time
during which the authority continues is determined by the nature of the act specifically authorized,
the formality of the authorization, the likelihood of changes in the purposes of the principal, and
other factors”. Moreover, the burden of proving the termination or revocation of an agency rests on
the party asserting it.
“Parol evidence cannot be admitted to add another term to an agreement even if the writing contains
nothing relating to the particular provision to which the parol evidence is directed”. Thus, courts
will not admit parol evidence while determining the duration of an agency contract where the
written contract is viewed as integrated, or unambiguous, or both. An agency continuing for a
reasonable time can be terminated by one party only after giving sufficient notice to the other party.
Different ways by which an agency can be terminated :-
An agency created for a specific purpose as well as an agency created by a power of attorney is
terminated once the particular purpose for which it was created was accomplished. After the
termination of the agency, the agent is free of any fiduciary duty to the principal arising from the
agency relationship.
The parties can terminate the agency by mutual agreement. An agency relationship requires the
mutual assent of the parties and both the parties have power to withdraw their assent. An agency
may not be terminated by the act of one of the parties and should be done mutually. The mutual
abandonment of an agency is a question of fact, since it is a matter of intention of both the parties.
The court will ascertain such intent from the surrounding facts and circumstances of the transaction
as well as implied from the conduct of the parties.
An agency contract may be cancelled on the basis of an express stipulation in the contract. In such
a case, the parties will have a right of cancellation at the will of either party or upon the happening
of a contingency or the nonperformance of some expressed condition. The principal cannot cancel
such an agreement at will so long as the agent fulfills his/her part of the agreement. However, the
principal can cancel the agency contract for any justifiable cause.
An agency may be revoked at the will of the principal when an agency is not coupled with an
interest, and no third party’s rights are involved. The party terminating the agency must show good
cause. Thus, when A enters into a contract whereby B is to provide A for a stated period of time
with goods or services, which both parties realize are for use in a particular enterprise owned by A,
in the absence of a specific clause so providing, A cannot escape his obligations under that contract
by voluntarily selling his interest in the enterprise before the expiration of the expressed contract
term. Therefore, if the right to cancel an agency contract is dependent upon some contingency, the
cancellation must be justified by establishing the happening of such contingency. An agency cannot
be terminated at will during certain specific instances. For example, in the matter of distributorship
or sales agency contracts of indefinite duration, an at-will termination is not feasible. In such a case,
the distributor might have made substantial investment in establishing or furthering the
distributorship. Hence, the agreement may be terminated only after a reasonable time has lapsed and
reasonable notice of termination is given. An agency contract to be performed to the principal’s
satisfaction can generally be canceled at will by the principal. Similarly, a power of attorney
constituting a mere agency may be revoked at any time, with or without cause.
A principal may unilaterally cancel an agency without incurring liability for breach of contract
under the following instances: misconduct or habitual intoxication of the agent which interferes
with his/her employment, the refusal of the agent to obey reasonable instructions or to permit the
principal to make a proper audit of his/her accounts, serious neglect or breach of duty by the agent,
dishonesty or untrustworthiness of the agent, the agent’s failure to pay an indebtedness owing to the
principal, disloyalty of the agent like using the agency to make secret profits.
Ordinarily, an agent may renounce the agency relationship by expressly notifying the principal,
either orally or in writing. An agent’s cessation of all relations with the principal, and abandonment
by the agent may be treated as a renunciation. However, mere violation of instructions by the agent
will not amount to renunciation. Although agency can be terminated at will, law stipulates that
notice must be given to the party affected by termination. However, express notice to the agent that
the agency has been revoked, or to the principal that the agency is renounced, is not always
necessary if the affected party actually knows, or has reason to know the facts resulting in such
revocation or renunciation. The principal shall provide sufficient notice to third parties as to the
revocation of agent’s authority. Otherwise, the acts of an agent after his/ her authority has been
revoked may bind a principal as against third persons who rely upon the agency’s continued
existence. This may often happen to transactions initiated by the agent before the revocation of
authority, and the rule is applied in favor of persons who have continued to deal with insurance
agents, purchasing agents, and the like.
There is no need to provide any formal written notice to third persons of the ending of an agency
relationship. Actual notice of termination is sufficient in the case of third parties and such notice
may be shown by a written or oral communication from the principal or the agent, or it may be
inferred from the circumstances. For instance, a third party is deemed to have actual notice if he/she
has knowledge of the fact that the principal has appointed another agent for the same purpose. The
character of the notice also differs with respect to third parties. Thus, actual notice must be brought
home to former customers who have dealt with the agency more directly, while notice by
publication will be sufficient as to other persons. In addition, an agency may be terminated by
operation of law. The death of the principal operates as an immediate and absolute revocation of the
agent’s authority, unless the agency is one coupled with an interest. The rule is the same even if the
agency is created with more than one principal. Where the power or authority is created by two or
more principals jointly and one of them dies, the agency will be terminated unless it is coupled with
an interest. However, an agency may be made irrevocable by statute, notwithstanding the death of
the principal.
Regarding the termination of agency upon the death of the principal, two views are prevailing.
According to one view, unless the agency is one coupled with an interest, it will terminate on the
death of the principal, notwithstanding the fact that the agent and third person are ignorant of the
fact. Another view is that if the third person dealing with the agent acts in good faith and in
ignorance of the principal’s death, the revocation of the agency on the death of the principal takes
effect only from the time that the agent receives notice of such death. In such a case, “the principal’s
estate may be bound where the act to be done is not required to be done in the name of the
principal.” Similarly, death of the agent will revoke an agency not coupled with an interest and this
is the rule when there are two or more agents. However, in the case where a sub agent is appointed
by the agent, the authority of a subagent is terminated by the death of the agent, unless the agent
appointed the subagent at the principal’s request. In that event, the subagent derives his/her
authority form the principal and not from the agent.
The loss of capacity of a party resulting from temporary or permanent mental incompetency may
result in the termination or suspension of the agency relationship. Thus, the termination of the
agent’s authority due to the loss of capacity of the principal may not affect the rights of third
persons if such third persons do not have notice of such fact. Also, if the agent’s authority is coupled
with an interest, it is not suspended by the principal’s insanity. Similarly, bankruptcy of the principal
is a valid reason for the termination of agency and the agent is divested of any authority to deal with
any assets or rights of property of which the principal was divested by reason of the bankruptcy,
irrespective of whether the agent receives notice of the bankruptcy. A power of attorney may be
terminated by the bankruptcy of the principal. The mere insolvency of the principal will not
automatically terminate agent’s authority.
A change in value of the subject matter or a change in business conditions may terminate or
suspend the agent’s authority if the agent should reasonably infer that the principal would not
consent if aware of such facts. Similarly, a change in legal identity of, or merger by, the principal is
a valid ground for termination of an agency contract. The loss or destruction of the subject matter of
the agency or the termination of the principal’s interest is yet another ground for terminating the
agent’s authority. The agent’s authority ceases when the agent has notice of the fact. However,
destruction of subject matter will not always result in termination of agency, especially when the
subject matter can be replaced without substantial detriment to either party.
In addition, a change of law making the required act illegal may terminate an agency contract. If the
authority or power of an agent is coupled with an interest, it is not revocable by the act, condition,
death, or mental incapacity of the principal before the expiration of the interest, unless there is some
agreement to the contrary. A power is coupled with an interest where the agent receives title to all or
a part of the subject matter of the agency. In order to support a claim of power coupled with an
interest, either legal title or equitable title is sufficient. A power coupled with an interest will survive
to the personal representative of the agent upon the agent’s death.
R. Sayani v Bright Bros (P) Ltd1,
Where an agency has been created for a fixed period, compensation would have to be paid for its
premature termination, if the termination is without sufficient cause. Reasonable notice for
premature determination of agency was not given. The agent was earning Rs. 4000 per month. The
court was of the view that at least three months’ notice should have been given. A compensation of
Rs. 12,000 was accordingly allowed.
Carter v White,2
A principal owed a sum of money to his agent and gave him an accepted bill of exchange with an
authority to fill in the drawer’s name. The principal died before the agent could complete the bill.
His authority to fill in the drawer’s name was held not to be terminated.
Sukhdev v Commr of Endowments,3
An agency comes to an automatic end on the expiry of its term. Where the agency was to run a
petrol pump for a specific period, it was held that the agent was bound to vacate the premises on
expiry of the period. There was no renewal clause , nor in fact there was any renewal.
Trueman v Loder,4
Here A traded as B’s agent. With the authority of B, all parties with whom A made contracts in that
business, were held to have a right to hold B liable to them until B gives notice to the world that A’s
authority is revoked and it makes no difference if in a particular case the agent intended to keep the
contract on his own account. The court repelled the contention that it was very unreasonable to
expect that the principal should inform the whole world that he has cancelled the power of attorney
given to his agent and that he cannot be expected to approach everybody with whom the agent was
likely to enter into a contract and inform him of the cancellation.

Agency can be terminated by following ways:

By Agreement
On the basis that agency relationship is created by agreement between the principal and the agent,
such a relationship can also be brought to an end by mutual agreement between the parties, either in
1 AIR 1980 Mad 162
2 (1883) 2 Ch D 666: (1881-85) All ER Rep 921.
3 (1998) 1 BC 403 (AP)
4 (1840) 11 Ad & El 589
writing or orally.
Termination by agreement may also occur if the agency relationship is terminated pursuant to the
provisions of the agreement itself. The following situations may arise in this context:
If the agreement provides for the appointment of the agent for a specified period of time, the agency
will come to an end automatically when that period of time expires.
If the agreement provides for the agency to terminate upon the occurrence of a specified event, the
agency will come to an end upon the happening of the specified event.
By the Act of Parties
An agency may be terminated by the acts of the either principal or the agent as illustrated below:-
Performance by the agent
If an agent is appointed to accomplish a particular task or for a specific purpose, when the task is
accomplished by the agent or the specific purpose is attained, the agency will terminate.

Revocation by the principal

The authority of an agent may be revoked at any time by the principal. However unilateral
revocation otherwise than in accordance with the provisions of the agency agreement may render
the principal liable to the agent for the breach of agency agreement.
Any word or conduct of the principal inconsistent with the continued exercise of the authority by
the agent may operate as revocation of the agency.
Revocation’s of the agent’s power by the principal may not automatically discharge the principal
from liability to a third party who is entitled to rely from liability to a third party who is entitled to
rely from liability to a third party who is entitled to rely from liability to a third party who is entitled
to rely on the apparent authority of the agent on ground’s of representation by the principal of
previous course of dealing with the agent’s before notice of revocation is given to the third party
.Therefore notice of revocation of an agent’s power should be given to the third party as soon as
possible.
Renunciation by agent
An agent is entitled to renounce his power by refusing to act or by notifying the principal that he
will not act for the principal.
Unilateral termination of the agency by the agent before he has fulfilled the obligations to the
principal under the agency agreement will render the agent liable to the principal for the breach of
the agency agreement such as payment of damages for the loss suffered by the principal.
By Notice
If the agency agreement provides that the agency may be terminated upon either party serving on
the other written notice of a specified duration.
However, if the agency agreement does not contain any termination provision, the general rule is
that reasonable notice has to be given to the other party to terminate the agency.
By Operation Of Law:-
An agency may terminate by the operation of law upon the occurrence of particular events:-
Where the party concerned is an individual:
By death
By insanity
By bankruptcy
Where the party concerned is a limited company
Winding up
Receivership
Frustration of the contract of agency.

Effect of Termination of Agent’s Authority

Sometimes former agents continue to act on their ex-principals’ behalf even though the agency has
ended. Once an agency terminates by any of the means just described, the agent’s actual
authority(expressed and implied) ends as well. Nonetheless, such “ex-agents” may retain apparent
authority to bind their former principals.
Third parties who are unaware of the termination may reasonably believe that an ex-agent still has
authority. To protect third parties who rely on such a reasonable appearance of authority, an agent’s
apparent authority often persists after termination. Thus, a former agent may be able to bind the
principal under his apparent authority even though the agency has ended.
Notice to Third Parties
Apparent authority ends only when the third party receives appropriate notice of the termination,
that is, when it is no longer reasonable for a third party to believe that the agent has actual authority.
Some bases for termination by operation of law (such as changed circumstances) may provide such
notice.
Under the Restatement (Third) of Agency, an agent’s apparent authority may continue even after the
principal’s death or loss of capacity. An agent may act with apparent authority following the
principal’s death or loss of capacity because the basis of apparent authority is a principal’s
manifestation to third parties, coupled with a third party’s reasonable belief that the agent acts with
actual authority. When third parties do not have notice that the principal has died or lost capacity,
they may reasonably believe the agent to be authorized. The rule that the principal’s death does not
automatically terminate apparent authority is consistent with the interest of protecting third parties
who act without knowledge of the principal’s death or loss of capacity.
To protect themselves against unwanted liability, however, prudent principals will want to notify
third parties themselves. The required type of notification varies with the third party in question.
For third parties who have previously dealt with the agent or who have begun to deal with the
agent,actual notification is necessary. This can be accomplished by-
(1) a direct personal statement to the third party; or
(2) a writing delivered to the third party personally, to his place of business, or to some other place
reasonably believed to be appropriate.
For all other parties,constructive notification Usually, these other parties are aware of the agency
but did no business with the agent. Constructive notification normally can be accomplished by
advertising the agency’s termination in a newspaper of general circulation in the place where the
agency business regularly was carried on. If no suitable publication exists, notification by other
means reasonably likely to inform third parties—for example, posting a notice in public places or at
a website—may be enough.

Claim for damages

Apart from revocation of agency, the principal may also claim damages/losses sustained due to the
acts/non-acts of the agent by referring the matter to arbitration as stipulated in the contract of
agency. It also is well settled that the party who has breached the contract and has by his conduct
exhibited the traits of having abandoned or renounced the obligations under the contract will not be
entitled to claim damages from the other side. In this case, the sole selling agent, having exhibited
uncooperative attitude and conduct and by virtually sabotaging the business of the principal,
notwithstanding his clear obligations both under the agreement and the Contract Act, would have no
case to go before any court and seek damages or compensation – on the contrary, the principal
would be well justified in claiming damages and expenses/costs against the sole selling agent. In
view of the ‘doctrine of necessity’, the dispensing with prior to six months notice would be justified
and reasonable – otherwise, to wait for six months and play into the hands of an untrustworthy
agent would only witness the complete obliteration of the principal’s business.
Conclusion
A contract of agency is a species of the general contract. As such, an agency may terminate in the
same way as a contract is discharged except where the agency is irrevocable. The relation of
principal and agent can only be terminated by the act or agreement of the parties to the agency or by
operation of law. “An agency, when shown to have existed, will be presumed to have continued, in
the absence of anything to show its termination, unless such a length of time has elapsed as destroys
the presumption Agency may be brought to an end either by the act of the parties, or by operation of
law”. Agency may be terminated by subsequent events. These may be physical, as where, for
example, the subject matter is destroyed, or the principal or agent dies, or becomes insane.
Alternatively, they may be legal, as where the principal or agent becomes, bankrupt, or the
relationship becomes illegal (for example, if the principal becomes an enemy alien). The effects of
termination are that as far as principal and agent are concerned, rights vested at the time of the
termination will subsist, but no new rights can be created, at least once the agent has notice of the
termination. Where the agency was created by agreement, it will be determinable in the same way.
A continuing agency may also be determined by giving such period of notice as is specified in any
agreement, or failing that, reasonable notice. Finally, if either party acts in a way which is
inconsistent with the continuation of the agency then it will be terminated though of course this may
well give rise to rights of action for breach of contract. As regards termination by operation of law,
if an agency is for a particular transaction, the relationship will terminate when that transaction is
completed. If it is for a specified period, it will cease at the end of that period.